Stock investors typically overreact to early reports on Black Friday and Cyber Monday.
At a minimum, that means you should ignore these reports. And if you’re against the grain, a courageous short-term trade might be to bet that the market after Cyber Monday will reverse the direction it took in its first two post-Thanksgiving trading sessions.
I came to these conclusions by analyzing the reaction of the stock markets during Black Friday and Cyber Monday. I documented a strong reverse correlation between its net return on these two sessions and its performance after Cyber Monday until the end of the year.
I’ve written about this reversal pattern before and it continues to hold up. Take last year, when Black Friday traffic in US stores was down 52%. Although online sales were part of the slowdown, the S&P Retail Select Industry Index SPSIRE,
fell a further 1% over the two Black Friday and Cyber Monday sessions. But then came the reversal: after Cyber Monday until the end of 2020, the index gained 7.4%.
A year of experience doesn’t make a boss, of course. The graph below shows the averages for all years since 1999, when this index was created. There is a 6.3 percentage point difference between the two averages, which is statistically significant.
I also found evidence of this reversal pattern in the DJIA Dow Jones Industrial Average,
although it is lower for this general index than for the retail sector in particular. Consider the performance of DJIA since 1981, which according to Wikipedia is the first known reference to Black Friday as the day when retailers go from red for the year to black.
When DJIA on the first two post-Thanksgiving trading sessions
Average performance of DJIAs after Cyber Monday through the end of the year
Note carefully that, for the DJIA, this inversion model is only marginally statistically significant (at the 93% confidence level, and not at the 95% level that statisticians often use to determine whether a model is authentic). These statistics do not therefore justify throwing caution to the wind with an end-of-year bet, especially at the level of the global market.
The biggest investment to remember is to sit on your hands while you read and hear talking heads endlessly analyzing early retail reports. At a minimum, these initial reports are worthless, and perhaps even worse than worthless.
The larger investing lesson is that investors usually overreact. To disappointing news, they will react thinking the world is coming to an end, and to better-than-expected news, they will conclude that the happy days are here again.
Either of these extremes is rarely the case. That’s why sitting on your hands is good advice almost any time of the year, not just during and after Thanksgiving.
Mark Hulbert is a regular contributor to MarketWatch. Its Hulbert Ratings tracks investment newsletters that pay a fixed fee to be audited. He can be contacted at [email protected].
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